Cashing out Life Insurance if you are terminally ill

By Compuquotes Team on March 27th, 2008

Most terminal illnesses aren't sudden and short, all too often the terminally ill suffer for months or years, often spending their last pennies to try new treatments or paying for expensive medications. One financial asset that is often overlooked is a life insurance policy.

Types of Insurance and Policy Pay-outsTerm life insurance is a policy that is renewable intermittently, sometimes once per year, other times every 5 or 10 years. Should the policy holder die during the insurance coverage period, their beneficiary receives the face value of the policy. If they do not die during the coverage period, the policy holder receives nothing. Very few term life insurers offer a buy out option.

Whole life insurance is the most basic type of insurance plan. You pay premiums and receive a policy of known face value. There is often a small return in the form of investment interest, though usually not much beyond the rate of inflation. Whole life policy holders are able to take out loans against their insurance policy, often up to 90% of the face value.

Universal life insurance is the most flexible and offers the highest rate of return. It also requires policy holders take the most risk. The cash out value depends on the length of the policy and how much the policy holder has invested.

Pay Out Options
Universal life policy holders can request funds if they are terminally ill from their policy managers or mutual fund managers. While life and term life policy holders must enter into a viatical settlement. A viatical settlement requires that the policy holder name the investor as the beneficiary of the policy and in return the investor offers the policy holder a portion of the policy's face value.

The terminally ill policy holder receives a lump sum from the investor, usually 60% - 75% of the policy's face value in cash. The investor, in return, collects the entirety of the policy once the terminally ill policy holder dies.

The longer the policy holder is expected to live, the longer the investor is required to wait for his return so the smaller percentage the policy holder receives in the settlement. The larger the insurance policy, though, the higher percentage the policy holder receives.

Most viatical settlements require the policy holder have a life expectancy of less than two years and that the policy be at least two years old. A broker is often the middle man of this process, overseeing the paperwork. Brokers are not licensed or managed by any government agency, so care should be taken in choosing one.

Policy holders that are terminally ill should understand the consequences of selling out a life insurance policy. Income taxes must be paid on the proceeds of the policy sell. Spouses, partners and children will have no claim to the policy once they have passed away.

Before entering into a viatical settlement, the terminally ill should contact their insurance policy carrier to inquire about loans against their policy. These are not taxable, and while they may require annual interest payments, the loans are paid off when the policy holder dies.